M&A Leverage

Go West - Key to Successful Western Acquisitions by Asian Firms.



Asian-based companies are likely to continue outbound M&A transactions into the US and European regions between 2012 and 2017. Low valuations, significant cash on hand, and attractive financing rates are making it easier for them to acquire western companies at low post-recessionary prices. However, acquiring US and European companies can be risky if inexperienced firms are unskilled at talent retention, cultural integration and seamless integration execution. This article highlights the opportunities, risks and practical steps recommended for Asian-based acquirers to ensure they over-achieve their transaction objectives, particularly when entering US and European markets.


Aon Hewitt’s Global M&A Pulse survey completed in Q3, 2011 found that 50% of Asia Pacific-based survey participants indicated that they were targeting North America and European markets for future transactions.
These indications are proving true and are likely to continue in 2012 and beyond. In 2011, the pace of outbound Asian- based M&A transactions nearly rebounded to the levels observed before the recession. Between 2002 and 2007, the number of outbound deals from Asia skyrocketed, reaching close to 900 deals in 2007 (nearly six times 2002 levels).
Despite a sharp drop in volume in 2008 and 2009, the pace has quickly recovered, exceeding 800 transactions again in 20112. This upward trend is likely to continue, driven by a few key factors outlined below:

  • Lower Market Valuations: Low US and European valuation multiples persist when compared to pre- recessionary levels. According to Capital IQ, while the median enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple for strategic transactions in the US climbed back to 11.4X in 2011 (compared to 8.1X during the trough of 2009), it remains below the 12.0x multiple experienced in 2007.3 The same findings hold true for European ratios. Research by Robert W. Baird highlights a similar trend in the middle market, as median transaction multiples (EV/EBITDA) paid for US and European-based middle-market companies continue their recovery, but remain below 2007 levels.

  • Lower Debt Ratios: Estimates by StarMine indicate that Asian-based companies sit at an average net debt/equity ratio of .49, which is roughly one-half of the European ratio and a third of the North American ratio. These low debt ratios, combined with extremely attractive financing rates, suggest that Asian-based firms have the ability to finance transactions cost-effectively without taking on excessive risk via operating leverage.4

  • Stronger Currency Valuations: Finally, Japanese buyers are benefiting from increased buying power, as the yen has strengthened considerably against the US dollar and the Euro over the last four years. According to Thomson Reuters, Japanese companies spent a record USD69 billion on foreign deals in 2011, including ~USD31 billion in the Americas and ~USD24 billion in Europe.5

These drivers suggest that outbound deals from Asia into the US and European markets are likely to continue with China, India, Japan and Australia leading the charge. However, they are not without risk.


Most acquisitive Asian-based companies undertaking outbound transactions have traditionally adopted a “portfolio” approach to managing acquisitions by allowing the acquired company to operate independently. Over the past two decades, many acquisitive western companies (e.g., GE, Philips, and Siemens) also utilized this approach. However, most western companies have adjusted their integration approach as they found that it was difficult to reap significant value from transactions, when the acquired organization(s) were not ultimately integrated into the parent company.

A few Asian-based companies (e.g., Aditya Birla Group, M&M and the TATA group) have learned from the  successes (and mistakes) of their western peers. While a few companies’ experiences have been positive, many outbound transactions have failed to achieve their objectives.
Unfortunately, integration into larger corporate organizations is more complex and fraught with higher risk. Challenges that Asian-based outbound acquirers have experienced include: loss of executive and key talent, integration execution delays, and cultural assimilation hurdles. These risks are further outlined below:

  • Leadership and Key Talent Flight: Organizations that tend to under-achieve their transaction objectives often do so because they lose leadership and key talent at an increasingly higher rate than other acquirers. This is increasingly prevalent in outbound Asian transactions. Differences in experience levels, decision-making approaches and communications make it exponentially more challenging for acquiring organizations to engage and retain the target company’s leadership and key talent.

  • Integration Execution: Unsophisticated acquirers often lack a seasoned team and rigorous process for executing integration initiatives, particularly organizational harmonization and synergy identification and capture. Organizational harmonization and synergy capture initiatives are frequently de-prioritized (or outright ignored) by Asian-based acquirers as they seek to allow  the acquired organization the autonomy to make decisions on synergies, growth plans, etc. This autonomy ultimately has the unintended effect of leaving synergies uncaptured and newer market opportunities unrealized.

  • Cultural Dissonance: The risk of cultural dissonance is high between Asian-based acquirers and US and European targets, due to differences in national culture, leadership and communication styles, and decision-making approaches. Differing time zones, levels of leadership maturity, and language challenges exacerbate these challenges making the likelihood of cultural “dis-integration” more likely. For example, historically in US and European companies, decision-making authority is included in the roles and responsibilities of a particular position held by an individual. However, within Asian- based companies, decision-making authority is often unique to a particular individual or a small group of individuals. Consequently, decision-making can be hampered by the ambiguity surrounding decision authority. This is critical as the volume and pace of decisions increases exponentially during a deal. One large Chinese technology outsourcing company failed  to consider cultural ramifications during its acquisition of several telecommunications outsourcing employees based in Hong Kong. Because of generational gaps and differences in leadership style, employee engagement plummeted and turnover skyrocketed after they were hired.

  • Communications: Communications are another area where differences can impede integration. In US and European companies, communications are often two-way with the opportunity for input and dialogue between executives and line managers. By contrast, executives in Asian-based companies (particularly in Chinese firms), often make decisions and communicate them to line managers and supervisors without their input or feedback. Such an approach to decision-making and communication can convey a lack of interest on the part of the acquiring company for the opinions of the target company’s employees, hence, driving lower engagement and increased turnover at the point when retention is most critical.

“The bottom-line is that while organizations understand cultural integration is critical to deal success, they continue to struggle to translate this into actionable initiatives that drive cultural integration forward.” Elizabeth Fealy, Global Co- Leader of Aon’s Mergers and Acquisitions Practice.

Consequently, it is critical for Asian-based acquirers to increase their attentiveness and ability to lead outbound M&A transactions differently than previous efforts.
This is particularly true for companies that don’t have seasoned M&A executives who have been through various transactions. Aon Hewitt’s research on M&A transactions, based on a sample of 96 companies representing over USD$568 billion in total deal value over a two-year period, revealed that over USD$54 billion of deal value rides on the rate at which critical employees separate during or immediately following deals. With roughly 10% of overall deal value at stake, engagement and retention issues clearly have the potential to wipe out much of the synergy value sought in these transactions. Acquiring companies that prepare for these challenges are much more likely to achieve transaction success.

Practical Execution​

Aon Hewitt’s research on the effectiveness of cross-border M&A transactions has found key differences between the practices of companies that over- or under-achieve their transaction aims. Specifically, Asian-based companies that have successfully executed outbound M&A or expansion transactions have adopted several practices to ensure they over-achieve their transaction objectives.

First, they proactively establish an M&A team and get them ready for deals, and they conduct rigorous due diligence on the target company to proactively understand the HR issues before they arise during the frenzy of the deal. Second,  they establish an effective governance structure to drive integration activities, decisions and input from the acquiree. Finally, they spend far more time on cultural assimilation implementation activities. More on each of these points is outlined below.

  • Preparing the Team: Companies that have successfully executed either large-scale, complex transactions or a small number of unique cross-border deals have done so by preparing a small senior team of business and HR leaders for M&A work. This preparation includes immersion in the language, risks, and processes of cross-border efforts from due diligence through integration execution. They provide proven, practical processes, instructions and cases for understanding M&A transactions and their associated risks. They simulate transactions well before the transaction materializes to allow the team to learn before doing. They acclimate the team to the laws, practices and cultures of the target company or country under consideration. Companies like Aditya Birla Group and others have invested heavily in dedicated M&A teams, training, and tools to enable seamless due diligence through integration execution.
  • Contextual Due Diligence: Basic due diligence on the human capital and risk-related issues often includes a rapid review of executive compensation, health and welfare plans, collective bargaining and works councils agreements and retirement plan designs/funding levels. This review is particularly important in European countries where labor laws, works councils and employment requirements vary by country and can be the most stringent in the world. The impact of items such as US change-in-control, pension funding, paid-time-off or European employment or severance-related costs can range in the millions for an acquirer who fails to build these calculations into their financial model and purchase agreement language. Sophisticated acquirers seek an in- depth understanding of the HR/labor market issues that exist on a local level in order to be well-prepared prior to negotiations.

Case Study

Chinese Global Telecommunications Firm

Over the past three years, a large Chinese global telecommunications firm has made significant strides in improving their capability to perform outbound M&A transactions into Europe and other developed nations. This company historically acquired targets in China, Malaysia and underdeveloped emerging markets. However, after a series of transactions under-achieved their expectations, they realized that a different approach to integration preparation and execution was warranted. They adopted a multi-pronged approach to improve their transaction- integration capabilities. The highlights of their strategy included several of the key elements described above, including:

  • First, they created a corporate team with a mixture of HR and business resources exclusively focused on employee transitions and hired regional employee transition leaders with in-depth local knowledge.

  • Next, the newly formed employee transition team worked with human capital acquisition integration small, medium, enterprises (SMEs) to create rigorous, repeatable processes, tools, and templates that were utilized on every transaction. At the immediate conclusion of each transaction, there was a profound emphasis on identifying and broadly sharing lessons learned.

  • Third, they developed robust, experiential employee transition training designed for both HR and business resources and conducted the training at both corporate and regional locations. Finally, they created an Employee Transition Community of Practice in which HR and business professionals are encouraged to ask questions and share lessons learned.

They invested heavily in the development of a human capital M&A toolkit with processes, instructions and content for conducting due diligence, integration planning and integration execution. This toolkit provided a common language and instruction set for integration leaders and team members during transactions to adhere to. This was especially important as Chinese resources worked abroad to execute transaction-related activities.
A critical component of the improvement in transaction execution has been an increased emphasis on target local leadership involvement in integration. They have had success pairing local target company leaders with Chinese resources to not only more quickly understand the inner workings of the target, but also to share organizational operating methods with the target company’s leadership.

The implementation of this multifaceted strategy is still in nascent stages, but recent success in more complicated transactions has demonstrated significant improvement and tremendous promise.


  • ​Establishing Deal Governance: Sophisticated western acquirers and a selective number of Asian firms have realized that having an integration strategy, plan, and disciplined process for transaction execution is   critical to achieving deal objectives. Prior to transaction announcement, acquirers are increasingly developing and validating integration hypotheses, alternative scenarios and plans to understand where and how synergies can be realized over various time horizons. These “game plans” allow executives to evaluate options well before the frenzy of deal activity hits post announcement. Acquirers and targets usually launch a global team to vet, implement  and measure synergy realization throughout the lifecycle of a transaction. To track progress against plan, companies are increasingly using technology to execute transactions across time zones, workstreams and milestones.
  • Two-Way Assimilation: Companies that over-achieve their transaction objectives realize that it’s imperative to focus on leadership and line manager retention and assimilation. This is particularly true for companies that are heavily dependent on intellectual capital. Early in the due diligence process, acquirers need to quickly inventory the critical leaders and key talent and following transaction announcement, work to retain them via retention strategies. Historically, many companies have used time-based retention bonuses that pay for remaining with the company a fixed period of time. However, more recently, companies are incorporating performance-  based requirements into them that encourage talent to “stay and play” over the next 18-24 months. These new approaches provide leadership continuity and allow the acquirer to evaluate leadership and high-potential talent for potentially broader leadership opportunities.

  • Leadership engagement: Sophisticated acquirers sustain the involvement of acquired leaders and key talent in global corporate on-boarding processes, critical integration and operational initiatives, and leadership/ high-potential development programs to ensure high engagement levels. This involvement provides acquired executives with access to the parent company executives and the opportunity to become more informed regarding strategic direction, corporate culture, decision-making protocols, and key influential leaders.

  • Region appropriate communication: Increasingly, acquirers have realized that communications approaches that work within a country (e.g., China to China) will  not work between Asia-based countries and western ones. Consequently, they are dedicating resources focused on line manager assimilation, seeking employee feedback, and providing proactive communications about organizational structure, leadership, and relevant HR policy changes. In a recent acquisition by an Indian automotive ancillary manufacturer – communication of the rationale behind the deal was planned during the pre-integration phase – which included identifying key employee groups, change ambassadors, and an integrated approach to the communications across various platforms and media.


Cash on hand, low debt levels and low enterprise valuations will likely continue to enable Asia-based companies to buy US and European-based companies at discounts to their pre- recession levels. Asian-based acquirers who learn from the successes (and failures) of their peers will be better prepared to reap the value of their transactions by avoiding risks, achieving synergies, and spurring continued growth in the US and Europe.



Michael Marzano, Partner, Aon Mergers and Acquisitions Practice (michael.marzano@aonhewitt.com)
Jonathan Hendrickson, Aon Hewitt’s Global Strategy & Planning Leader (jonathan.hendrickson.3@aonhewitt.com)

Special thanks to: Brian Wade, Frederico Setti, Mark Oshima, Kurt Ewen, Sharad Vishvanath and Jaidev Murti for their ideas, insights and hands-on experience in drafting this article.


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